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Are Originators Overlooking The Remodeling Sector?

Freddie Mac sees it. The Harvard Joint Center recognizes it. And at least one giant bank is on to it, too. The question is: Are you?

3D rendering of planned remodeling to be done through renovation loans.
National Mortgage Professional Contributing Writer

We’re talking about the boom in remodeling. Last month, Freddie Mac rolled out a brand new product to capture a share of the huge market. Earlier, Bank of America reported that two-thirds of young home owners plan to renovate their homes. And the Joint Center for Housing Studies said owners will continue to invest in their properties well into next year.

Let’s start with the Joint Center, which tells us that Americans spend more than $400 billion a year on residential renovations and repairs. That alone should set your antenna to wiggling. But in its latest report, the Center’s Remodeling Futures Program says it expects growth in the sector to “remain solid” for the rest of this year and into 2022.

The Program’s Leading Indicator of Remodeling Activity, which is a short-term indicator of home improvement and repair spending on owner-occupied houses, projects “a healthy pace” of single-digit gains, with nearly 5 percent growth by next year’s first quarter.

Panelists on a National Association of Home Builders press conference saw an even longer timeline, predicting that remodeling will roll at a “healthy pace” for at least two more years. “There is steady consumer demand,” said Vince Butler, a remodeler from Clifton, Va. “Because people are using their time at home to remodel,” agreed Arlington, Tex., contractor Tim Landsford, “the demand and the backlog for remodeling remains high.” 

The Joint Center’s Managing Director, Chris Herbert, cited a number of factors that point to owners’ continued investment in their properties. And only one – stimulus money from Uncle Sam in the wake of the pandemic – is likely to go away. The others include strong house price appreciation and the aging of the nation’s housing stock. More about those shortly.

Fixer Uppers

Although the surge of do-it-yourself projects has fallen off as the economy has re-opened, Abbe Will, who helps run the Joint Center’s remodeling program, says a shift to more professional jobs has more than offset the slide. Owners have “undertaken (the) larger discretionary renovations” they postponed during the early part of the virus outbreak, Will says. That alone should boost annual spending in just remodeling – not including repairs and maintenance – to $370 billion by Q1-22, according to the LIRA.

Similarly, in May, the National Kitchen & Bath Association said its market index “soared” in the first quarter, jumping to the highest point ever. One in three designers in the group reported their clients now are requesting higher-priced products and finishes. And retailers are experiencing the same shift. Kitchen and bath remodeling account for a major share of the entire renovation market.

Part of the trend is likely due to fact that quick-fix, pandemic-driven DIY projects have run their course. Now people are taking on serious make-overs. “As consumers experience more flexibility in their working arrangements, there’s an increased need for total reconfiguration (of) their spaces,” commented Todd Tomalak of Johns Burns Real Estate Consulting, which compiles the NKBA index.

The trend isn’t getting as much attention as it should, according to the folks at Bank of America, which covered the sector in its recent Homebuyer Insights Report. The survey of 2,000 current or future owners – with an over sample of 185 first generation owners – found that many are eager to refresh their living spaces.

BoA found that nearly half the younger respondents said they prefer to purchase a fixer-upper and improve it over time as opposed to buying something that’s move-in ready. Seven out of ten members of the younger set have recently completed do-it-yourself work, whether it’s just painting a room or two or going all out by rejuvenating a bathroom or the kitchen.

Changing Dynamics

Their motivations are changing, too. Traditionally, home improvements have been undertaken as an investment, as a way to add value. But the big financial institution found that twice as many of those polled now are approaching home improvements as a way to enjoy their living space. Indeed, more than half plan to remodel before they move into their new digs or right when they move in.

Other factors are at work, too. Nearly half of the prospective buyers surveyed said they preferred buying an existing home, preferably a fixer-upper, and improve it over time. One reason: These houses are typically less expensive. But another is the fact that the nation’s housing stock is old and getting older, so they may have no choice.

The age of our houses is an important remodeling market indicator. Older houses are simply less efficient, not only when it comes to energy but also in terms of utility. According to the latest Census Bureau data, the median age of owner-occupied homes is 39 years. But that figure varies widely across the 50 states.

New York has the oldest, with a median age of 60 years, followed by Massachusetts at 56 and Rhode Island at 55. Newer homes, meanwhile, are mostly concentrated in the Sun Belt states where 14 out of 15 have stocks younger than the national median. The exception is California, with a median age of 43 years.

Escalating Value

And then there’s surge in housing values over the past year or so, a rush that has led to a rise in equity-rich homeowners just itching to retool their places rather than move onward and upward. Actually, the big jump in appreciation has helped homeowners at both ends of the spectrum.

In its latest report, data cruncher ATTOM says a third of all mortgaged properties are now equity rich, meaning the loans outstanding on their properties add up to no more than half their estimated market value. At the same time, only 4 percent of mortgaged houses – just one in 24 – are still considered seriously underwater with debt exceeding value by 25 percent. Both are improvements that were the largest in two years, the company reported.

Recent home buyers were inspired to do the work themselves by cable TV. Half learned from watching videos online and 39 percent were motivated by channels such as HGTV. It’s worth noting here, though, that many DIYers often find themselves in over their heads when they take on work they know nothing about, and end up calling on a pro to finish what they started.

But whether they are successful or they hire contractors from the get-go, they still have to pay the freight. And when it comes to the larger jobs, it often means financing. Fortunately, plenty of options are available, from cashing in some of their equity to rehab loans from the Federal Housing Administration or through Fannie Mae and Freddie Mac.

Surprisingly, though, Bank of America found that some folks don’t know they can access their equity to pay for the improvements they want to make. Actually, they don’t know much at all about how to pay for renovations, says Ann Thompson, the bank’s specialty lending executive. “Homeowners don’t get much information when it comes to how to pay.”

Broker Of Opportunity

In reality, BofA says owners often combine a variety of funding sources. The survey found that they mostly tend to use savings or to a lesser degree a home equity line of credit, a credit card or money invested in the stock market. Nowhere in this list are the various rehab mortgage offerings.

I don’t want to get too deep into the weeds here, but here’s a quick look what you can offer your clients:

The FHA’s 203(k) loan can be used by buyers as well as owners to purchase or refinance their homes by adding up to $35,000 in rehab costs to the mortgage principal to make repairs or improvements. It is FHA's primary program for the rehabilitation and repair of single family properties.

Borrowers can’t use the loan to finance major structural alterations, but they can use it to replace leaky windows and doors, an old roof and otherwise update an older property. Buyers can use the funds to make repairs identified by an appraiser or home inspector or make improvements before they move in. And owners can use them to make repairs, improvements or to ready their places for sale.

Fannie Mae’s Homestyle Renovation Mortgage is a conventional mortgage that lets borrowers finance improvements, renovations or repairs to a home at the time of purchase or as a refinance transaction. It even can be use to renovate accessory units like in-law suites or basement apartments – or those ADUs that are all the rage. And with some limits, manufactured housing also qualifies.

For purchase money mortgages, renovation costs are limited to 75 percent of
the lesser of the purchase price plus the renovation costs or the “as completed” appraised value. For refinancing, the ceiling is 75 percent of the “as completed” appraised value.

Freddie Mac’s renovation loans are similar, save that manufactured homes are ineligible. But one-to-four unit site-built houses qualify, as do investment properties and second homes.

This summer, Freddie rolled out a new mouthful of a mortgage – CHOICEReno eXPress – to help cover the cost of small-scale renovations with a single-close. It is a more affordable option than offered by credit cards or unsecured loans. Proceeds can be used to pay for renovations of up to 10 percent of the home’s as-completed value – or up to 15 percent in some rural regions. Depending on the purchase price, it doesn’t require special lender pre-approval or lender recourse. But an inspection is required to verify the planned work was completed.

If products like these aren’t in your quiver, it says here that they should be. After all, refinancing will eventually run its course as rates begin to rise, and purchase lending will slow for the same reason. Remodeling, though, is like the Energizer Bunny. It just keeps on going and going.

This article was originally published in the NMP Magazine September 2021 issue.
About the author
National Mortgage Professional Contributing Writer
Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C.,…
Published on
Sep 20, 2021
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